1. 6a – Consumer Decisions
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2. 6a – Consumer Decisions
Law of Diminishing Marginal Utility (the graphs)
Theory of Consumer Behavior (the utility maximizing rule)

3. 6a – Consumer Decisions
Must Know / Outcomes
Define, Draw, and Describe the total utility and marginal utility graphs
Understand the relationship between the total utility and marginal utility graphs
Understand the law of diminishing marginal utility.
Describe how rational consumers maximize utility by using benefit-cost-analysis. (Utility maximizing rule; MUx/Px = MUy/Py = MUz/Pz )
Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model
If lobster was free and if lobster was your favorite food, would you eat lobster for every meal everyday? Why or why not?
Why do pop vending machines allow you to only get one can at a time while newspaper vending machines allow you to take as many as you want when you only pay for one?
Why do we have to divide by price in the utility maximizing rule?
Benefit Cost Analysis: MB = MC
Utility Maximizing Rule: MUa/Pa = MUb/Pb

4. 1. The utility of a good or service:
is synonymous with usefulness
is the satisfaction one gets from consuming it
is easy to measure
rarely varies from person to person

5. 1. The utility of a good or service:
is synonymous with usefulness
is the satisfaction one gets from consuming it
is easy to measure
rarely varies from person to person

6. 2. Marginal Utility (MU) is the:
Sensitivity of consumer purchases of a good to changes in the price
Change in TU divided by the price
TU divided by the quantity consumed
Change in TU obtained from consuming one more unit

7. 2. Marginal Utility (MU) is the:
Sensitivity of consumer purchases of a good to changes in the price
Change in TU divided by the price
TU divided by the quantity consumed
Change in TU obtained from consuming one more unit

8. 3. What is the MU of the fourth unit of product L?20 18 4 2

9. 3. What is the MU of the fourth unit of product L?20 18 4 2

10. 4. The law of diminishing MU states that:
TU is max’ed when consumers obtain the same amount of utility per unit for each unit consumed
Beyond some point additional units of a product will yield less and less extra satisfaction
Prices must be decreased to induce firms to supply more of a product
When TU is at its max then MU is also at its max

11. 4. The law of diminishing MU states that:
TU is max’ed when consumers obtain the same amount of utility per unit for each unit consumed
Beyond some point additional units of a product will yield less and less extra satisfaction
Prices must be decreased to induce firms to supply more of a product
When TU is at its max then MU is also at its max

12. 5. To maximize utility a consumer should spend their money so that the:
Elasticity of demand on all products is the same
MU obtained from the last dollar spent on each product is the same
TU derived from each product consumed is the same
MU of the last unit of each product consumed is the same

13. 5. To maximize utility a consumer should spend their money so that the:
Elasticity of demand on all products is the same
MU obtained from the last dollar spent on each product is the same
TU derived from each product consumed is the same
MU of the last unit of each product consumed is the same

14. 6. Suppose that the MUx/Px > MUy/Py, to maximize utility the consumer should buy:
Less of X only if its price rises
More of Y only if its price rises
More Y and less X
More X and less Y

15. 6. Suppose that the MUx/Px > MUy/Py, to maximize utility the consumer should buy:
Less of X only if its price rises
More of Y only if its price rises
More Y and less X
More X and less Y

16. 7. If PX=$2, PY=$4, income = $20, how many of each will a rational consumer buy?
6X and 2Y
4X and 3Y
2X and 4Y
0X and 5Y

17. 7. If PX=$2, PY=$4, income = $20, how many of each will a rational consumer buy?
6X and 2Y
4X and 3Y
2X and 4Y
0X and 5Y

18. 8. If PX=$2, PY=$4, income = $20, what is the maximum TU possible?
87 utils
104 utils
64 utils
58 utils

19. 8. If PX=$2, PY=$4, income = $20, what is the maximum TU possible?
87 utils
104 utils
64 utils
58 utils

20. 9. TU can be determined by:
Change in TU / change in Q
Summing the MU of each unit consumed
Multiplying the MU of the last unit consumed by its price
Dividing the MU of the last unit consumed by its price

21. 9. TU can be determined by:
Change in TU / change in Q
Summing the MU of each unit consumed
Multiplying the MU of the last unit consumed by its price
Dividing the MU of the last unit consumed by its price

22. 10. When TU is at its maximum, MU is:
zero
negative
positive and increasing
positive but decreasing

23. 10. When TU is at its maximum, MU is:
zero
negative
positive and increasing
positive but decreasing